It has drawn swinging criticism by city heavyweights such as the former head of the FSA Lord Adair Turner and is consistently a divisive issue amongst financial commentators. Yet, the peer-to-peer lending sector is continuing to grab headlines with its explosive growth rate. How fast exactly? According to data gathered by AltFi lending volumes through P2P platforms achieved a staggering compounded annual growth rate of 110% between 2011 and 2016 and shows little sign of letting up this year.
Despite such impressive growth, there is scepticism that the industry can maintain momentum in the medium term. The 2008 financial crisis left in its wake a perfect macroeconomic environment for the sector to thrive. Rock-bottom interest rates and risk-averse banks have provided an ample supply of both credit hungry borrowers and yield-seeking lenders to fuel the industry. However, there are some indications this honeymoon period for the industry may be over as the UK’s inflation rate hit 3.0% last month piling pressure on the Bank of England to raise interest rates. This is an understandable worry for the industry, as much of the lending it facilitates is higher risk than that of the traditional banking sector.
Critics also point to the economic fall out of last year’s Brexit vote that is showing signs of stifling business borrowing, which has up to now been the fastest growing segment of P2P lending. However, the double-headed Brexit dragon of real income stagnation and falling consumer confidence is failing to significantly dampen UK house prices or housing demand. Property development makes up a significant part of P2P lending volumes and robustness in this segment will prove an important boon for the industry.
Furthermore, there are several emerging industry trends, which are likely to boost its resilience to deteriorating economic circumstances.
- Consolidation- While nearly 100 platforms are operating in the UK a resilient oligopoly is emerging. This is made up of the markets four largest lenders: Zopa; Funding Circle; LendInvest and Rate Setter who cumulatively facilitate over 70% of lending volume. As the sector continues to mature and venture capital interest begins to wane it seems likely these firms will continue to cement their grip on the sector. Speaking to the Business insider P2P lender Funding Options CEO Conrad Ford stated:
“It’s relatively inconceivable that we won’t have some platforms going under.”
- Securitisation- This may well prove critical for the sectors future success. The liquidity provided by securitising P2P loans should help encourage greater investment by the larger traditional fixed income investment institutions such as pension funds. Several of the market’s leading platforms initiated the securitisation of loans originating through their platforms for the first time last year. Previously, P2P platforms lacked the scale to make securitisation economic and this new trend will likely provide a further edge to the industries established participants.
- Diversification- There are clear indications that P2P lenders are seeking to broaden the services they offer. Last year Zopa, the current UK P2P market leader, announced plans to apply for a banking licence and launch a ‘next generation bank’ to complement its P2P lending service. Such a move has the dual benefit of helping to drive growth for the firms P2P lending services as well as providing the security of a diversified revenue stream. It seems highly unlikely Zopa’s competitors will not follow suit in some shape or form in the near future.
P2P lenders have managed to capitalise on innovative proprietary fintech, an increasingly tech-savvy consumer base, and shifting consumer preferences to conduct business online. Consequently whilst still a relative minnow in the financial industry P2P lenders have made great strides towards embedding themselves as an established investment medium. However, some firms will undoubtedly fold. It seems likely the industry’s leading firms will be able to adapt to changes in the economic climate and continue to take market share from the financial establishment.
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